Crypto Market Commentary 

26 March 2020

Doc's Daily Commentary


The 25 March ReadySetLive session with Doc and Mav is listed below.

Mind Of Mav

Fishing For The Bottom

Today we saw the Dow rally more than 1,300 points, capping its biggest 3-day surge since 1931.

Of course, nothing inspires confidence quite like the volatility of 1931, but the one billion dollar question we should be asking is: are we in a classic bull trap?

Well, that would seem to be the logical thing — considering the forward outlook. 

Many businesses will continue to stay shut down for months. Loans will prevent some bankruptcies but will have a severe negative impact on future earnings as they must be paid back.

Stimulus checks and boosted unemployment will drive increase consumer activity, but for non-essential industries that are shut down, they won’t see any of that money.

What other positive news comes after this? 

Congress likely won’t take further action for a few weeks. Cases will continue to explode. States and municipalities will start resorting to more strict and drastic measures, as well as other countries. Let’s also consider the very real possibility that Federal leadership continues to be less competent, rather than more.

Even with all of this, for those taking the bearish side of this outlook, you must remember one axiom above all: The market can stay irrational longer than you can stay solvent.

Still, this being the best day since 1933 says it all. Some of the biggest one-day gains were during the worst bear markets of all time. The market is prone to huge swings when a long bull run is ended by a collapse; just how bad should it be? How bad will it get? A lot of people are looking to time the bottom, just as they were looking to time the top a few months ago. This will only be the bottom if the pandemic is fizzling out, which, as discussed in our Discord today, is not within the realm of possibility as we are now over 50,000 new cases worldwide per day for the first time.

Interestingly, the stimulus bill affected the market but the worst unemployment numbers in a week ever, with 3.2 million claims last week, hardly dented sentiments (although volume was low today, which is very indicative of a tidal shift in the near future).

In today’s economy, there’s no punishment for company valuation when unemployment rises. There’s no punishment for company valuation in a recession. Companies will survive because of government bailouts and the working force will fail because of inflation.

Or, at least, that’s how the thinking goes. 

Long term, companies need customers to pay them. The bill does mean they will be able to pay them for the foreseeable future but Covid-19 hasn’t even really hit us hard yet.

It’s true that the ongoing relief rally is providing comfort. Maybe COVID-19 will run its course quickly. And maybe the unprecedented stimulus levels will reflate the 2020 stock bubble anew.

On the other hand, the financial markets will need to assess the progress of containing the coronavirus as well as the bounce-back ability of corporations. Which ones go bankrupt? Which ones get bailouts?

On top of that, financial markets still need to assess the internal damage at the corporations that we invest in. Revenue and profitability concerns are real. Assets like stocks are unlikely to head straight back to the stratosphere when the sales and profits of companies are floundering. After all, it’s the sales and profits that largely determine what investors are “buying into” such that, post virus, stocks may need to be re-priced lower.

Unfortunately, markets tend to overshoot fair value on the way down. The notion that everything will get better when extremely overvalued equities hit fair value seems fanciful.

Granted, nobody wants to think about the prospect of reversion to the mean in stocks. Nevertheless, even if one rejects the concept, one might need to consider that the 2,237 lows from March 23 might not hold.

Consider the fact that total returns for high yield bonds here in 2020 definitively cracked the Christmas 2018 lows. That increases the likelihood that the S&P 500 will follow suit.

Another possible way to bottom fish? Looking for the recession’s midpoint.

Remember, risk-taking often becomes beneficial about halfway to two-thirds through the period of economic contraction. So, if you’re one who subscribes to this notion, simply identify the recession time horizon. (Easy, right?)

According to the folks at Oxford Economics, the depth of recession will be worse than the 2008 financial crisis, but the V-shaped recovery will be epic in its ascent. Using the projections as a “base case,” the economic downturn began in March. And the expansion may ignite as soon as August.

In this exercise, a bottoming out would occur around the end of May. Bottom-seekers might wish to “re-risk” in everything from foreign equities to fallen angels – BBB-rated corporations that fell into the high yield debt (BB) category.

There’s another possibility that most will not like — and it’s often referred to as the “Iron Rule.” Specifically, reversion to the mean (regression to the trend) suggests that the bottom would be a 57.6% decline to the 1400 level for the S&P 500.

Why such a monster sell-off? Essentially, the stock bubble peak in 2000 marked an unprecedented 128% overshooting of the trend. That was leaps and bounds worse than the price move above the trend in the bubbles of 1901 and 1929.

For most of the 21 Century, though, the Federal Reserve has done everything in its power to keep stocks permanently elevated above a regression trend line. In 2020, they pushed it to a 133% above trend. And that’s why regression analysis place the S&P 500 down around 1400.

There have been opportunities to buy panic in the preferred space – preferred shares for established companies from Digital Realty Trust (NYSE:DLR) and QTS Realty Trust (NYSE:QTS). And the price deviations from Net Asset Values (NAVs) in munis made iShares National Muni (NYSEARCA:MUB) as well as VanEck Vectors High Yield Muni (BATS:HYD) difficult to pass up. After all, the Fed is buying muni bonds alongside mortgage-backed securities and short-term corporate credit.

Before celebrating the two-day turnaround in the stock indexes themselves, though, recognize the unlikelihood of quick resolution on a half dozen fronts. For example: (1) Scores of corporations will need to borrow more money, and they will need to do so at higher interest costs, (2) surging unemployment rates will put a damper on consumption habits for a bit longer than many are factoring in, (3) stock buybacks that helped fuel the 2009-2019 bull market will be curtailed, (4) CEOs will have a tough time in April with an ability to provide meaningful forward guidance on earnings, (5) risk-taking itself may be compromised in a post-virus world, and (6) short sellers take profits in bear rallies.

The best way to invest amid the heightened volatility? Make sure that you adhere to your systematic process. If you do not have a process that ignores price targets and predictions, then get one.

“Every battle is won, before it’s ever fought” – Sun Tzu

Anxiety, glee, disgust, sadness, boredom, fear, anticipation, anger, surprise, boredom, amusement, enthusiasm – we are all human. We’re all going to feel these emotions. Yet abiding by the rules of your process keeps emotions out of your financial decision-making.


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